New Year Market Massacre Intensifies as China Sickness Spreads

Here we go again. Last night, Chinese stocks plunged around 5% right off the bat. That triggered a temporary, market-wide trading pause.

Then when activity resumed, the benchmark Shanghai Composite Index dropped all the way to negative-7%. That halted trading for the rest of the day.

In the 25-year history of Chinese stock markets, there has never, EVER been a trading session that lasted only 29 minutes. A whopping 1,600 individual stocks plunged the maximum 10% that is allowed.

One Chinese investment manager dumped every stock his firm owned, telling Bloomberg, “This is insane.” A retail investor told the Wall Street Journal, “I am speechless,” after attempting to sell a stock only to find it had already tanked by its daily limit.

The yuan fell to another five-year low against the dollar.

The carnage spilled over into the currency market, too. The Chinese yuan dropped to yet another five-year low of 6.5646 against the buck. Investors now are widely assuming the Chinese economy is poised to slow even further, and are yanking money out of the country as fast as they can.

The evidence? We just learned that China’s currency reserves plummeted by a record $108 billion in December. Not only was that five times as much as economists forecast, but it also brings the total decline in reserves from the 2014 peak to a hefty $660 billion.

At $3.3 trillion, China’s hoard is still sizable. But it’s definitely getting smaller by the month. And China is far from the only country being forced to liquidate reserves and dump stocks and bonds held by their sovereign wealth funds. Those are the huge “hidden sellers” I talked about recently.

The carnage didn’t stay bottled up in China, either. European bourses all dropped by a few percentage points, while U.S. Dow futures plunged around 400 points in the early morning hours.

“The carnage didn’t stay bottled up in China.”

Then Chinese authorities tried to stem the panic by announcing they would suspend their current circuit breaker plan. That led to a bounce off the lows later in the morning.

But the bounce began to falter before long. Then the markets fell out of bed this afternoon when Reuters reported that the People’s Bank of China was being urged to allow an even-sharper currency devaluation. Advisors are reportedly recommending a quick drop of as much as 15% – much more than the mid-single-digit slump we’ve already seen. The Dow ultimately closed down 392 points on the day.

So what is the message of the markets? Where do we go next? I can’t say what’ll happen in the next few hours or couple of days. We may very well see an oversold bounce soon, given how far and how fast stocks have fallen.

Lastly, I can’t stress enough how caution should be your investing watchword until further notice. You can play market bounces with quicker trades. You can buy select, high-grade, high-yield blue chip names when panic takes hold, and generate some upside gains.

But if the overall trend continues to shift from up to down, as I first postulated in mid-2015, it will take new approaches and new investments to survive and thrive. At the very least, consider reading up on some of the inverse ETFs and hedge vehicles available from providers like ProShares. Or educate yourself about other tools like options at the CBOE. They can help protect against risk, and generate substantial profits, in down markets.

Now that I’ve shared my take on the action, I’m interested to hear yours. Is this the start of a fresh, major leg down in global markets? Or are we going to find our footing quickly? Should we be worried about what’s happening in China, or just continue to focus on the decent (though not great) domestic economy? Hit up the comment section and share your views.

Our Readers Speak

What’s going on with Apple (AAPL)? The auto industry? The markets overall? And how would you spend the dough if you hit the Powerball? Those are some of the topics you commented on overnight.

Reader Rick said the following about the former tech stock darling: “The competition has killed Apple’s cash cow market. Other products are cool and cheaper. They banked on China for continued growth and it isn’t going to happen. They don’t have any magic bullet product to replace the growth.

“Smart money will shift to other momentum stocks. Their CEO might want to read RIM’s tragic history. He’s repeating history.”

Reader Al weighed in on the auto sector, saying he’s surprised by all of the negativity: “It is amazing that the carmaker stocks are dropping. I could understand Volkswagen’s demise. Yet with sales records getting broken for most auto manufacturers, the slide can only be temporary in my opinion. Even oil prices being at an 11-year low should help carmakers.”

Reader Jim jumped into the discussion on the global economy, offering the following take: “The U.S. economy is not immune to problems overseas. The Saudis are losing $600 million a day and selling stocks and bonds to cover their losses. Mexico, Brazil, Venezuela, and Ecuador are basket cases.

“Our neighbor to the north, Canada, is in the tank. Russia, China, Japan, and all of Europe are in great peril. This low oil scenario is symptomatic of a worldwide malaise, breaking out all over. We will be in recession with the rest of them before you know it.”

The solution for all this negativity? Hit the Powerball jackpot! Reader Chuck B. said this is what he’d do:

“$500 Million? That would give me perhaps about $150 million after taxes from the single payment, which is all that would make sense at my age. I would put aside a few million for myself, give my heirs something, and set up a charitable foundation with the rest. That is about all that would make sense.”

Reader Phil was a bit more whimsical though, saying: “If I hit the jackpot, I will buy a yacht, a plane, and plenty of wine and women to populate both of these toys. Of course I will also need a supercar to get from one to the other.”

Dare to dream, eh? Well, Saturday’s drawing isn’t that far away.

As for stocks, let’s just say the market action we’re seeing now clearly validates the worries I’ve been expressing for the last seven to eight months here in Money and Markets and in my Safe Money Report. I haven’t liked large swaths of the market since last summer.

While we may see an oversold bounce at any time, this market truly does walk, talk, and growl like a new bear. So keep that in mind when you’re deciding on investing strategies. And whether you’re on the same page as me, or have your reservations about getting too bearish, let me hear your views in the comments section below.

Other Developments of the Day

Lackluster holiday sales claimed their latest victim late yesterday, when department store retailer Macy’s (M) said it would close 36 of its 770 brand name locations in the next few months. It’s also closing a St. Louis call center. As many as 4,500 positions will be eliminated, though some affected workers will be shifted to jobs elsewhere in the company.

Is today’s crisis like 2008 all over again? That’s what billionaire investor George Soros warned at an overseas economic summit. But Soros also said that this crisis is clearly centered in foreign markets and economies like China, rather than the U.S. as it was eight years ago.

The junk bond market meltdown is getting worse, at least by one metric. Not one single high-yield borrower in the U.S. has issued new bonds since mid-December. Dealogic said that’s the longest junk bond issuance drought going all the way back to 2009. I’m not surprised these lousy companies are having a hard time raising money — junk bonds delivered the worst annual returns since 2008 last year.

The war of words and recriminations between Saudi Arabia and Iran got worse overnight, with Iran accusing the Saudis of bombing its embassy in the Yemeni capital of Sana. Saudi Arabia has been attacking Houthi rebels in neighboring Yemen for several months, but it dramatically stepped up the intensity of the airstrikes overnight.

Nobody managed to pick the winning Powerball numbers last night, so the jackpot has rolled over yet again. The Saturday drawing could now result in winnings of an estimated $675 million — the most in any U.S. lottery ever.

There’s a lot of negative news out there to digest — on junk bonds, on financial markets, on the geopolitical front, and more. So please take a moment to comment on the stories I just highlighted, or any others on these topics, in the discussion section here.

Until next time,

Mike Larson

PS: Mike’s gala January Safe Money Report issue is out today. Click hereto get his five forecasts for the year ahead. You’ll also get specific “Buy” and “Sell” actions you can take right away to get your portfolio in shape for this tumultuous environment.

Recommended Articles by Mike Larson:

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

{57 comments }

Kevin RossThursday, January 7, 2016 at 4:48 pm

Crooks will be crooks i guess the robber barons of the financial markets aren’t satisfied with their gains, and need to dip more into wells that they drink from.

GordonThursday, January 7, 2016 at 9:49 pm

Yes that is true but its coming directly from your wallet in one way or another. If they really get crushed the government will dip into taxpayers money and bail them out by hook or by crook mostly crooked.

HowardFriday, January 8, 2016 at 7:10 am

If you are suggesting that markets are rigged against ordinary players you are right. The Chinese are newer to the game and more open about it. I was following an overseas bourse today when there was a sudden massive change as the Chinese markets opened. Programmed trading took control. Cash is still a good place to be at the moment.

ritam108Friday, January 8, 2016 at 10:04 am

How are following a bourse in China? Can u pls provide that URL? Fascinating.

Thanks.

IvanoThursday, January 7, 2016 at 5:13 pm

I am fed up with the panic with regard to China. Who cares if they implode! Their economic miracle has been money printing “Smoke and Mirrors”! America does not need China. What we should be concerned about is North Korea, thanks to bill Clinton permitting them to continue their nuclear program and Clinton allowing the sale of the algorithms required to program an intercontinental ballistic missile. Oh, gee I forgot. Obo just gave the green light to Iran so that they are now able to create plutonium! Forget China. Wake up People. Nine years of hot air pumped into the market… Did you expect it to continue on infinite buy-backs? Focus on what is good for America…nuts to China.

Chuck BurtonThursday, January 7, 2016 at 5:33 pm

If China “implodes”, will the U.S. be far behind? Our politicians have made us so dependent on China and other lower wage makers of things that we will be hurt very badly if they go under. Do we have a leader type with enough cojones to pull us out of the fire? The Donald is a laughing stock to most of the world, and he is about the only halfway ballsy type I see anywhere. I don’t like what I see!

JimThursday, January 7, 2016 at 6:01 pm

The Chinese Communist Party has tried to create a state controlled free market system. It’s an absurd concept that never had a chance to succeed. They have lost any element of control they ever had. Their stock market is tanking, their capital account is evaporating, the yuan is overvalued, their banking system a joke, their billionaires are disappearing, and they have no idea what to do next. What happens next isn’t up to us. It couldn’t happen to nicer folks. Jim

$1,000 goldThursday, January 7, 2016 at 6:10 pm

…and all hear from the experts is how the yuan is going to overtake the dollar and become the world’s new default currency. fat chance.

151Thursday, January 7, 2016 at 7:33 pm

hmmm….”a state controlled free market”….is that Bernie and Hillary get their ideas?

GordonThursday, January 7, 2016 at 9:56 pm

How can the Chinese stock market or any market be a free market system? We accept all the gains with cheers and champagne but them when things turn ugly and the gains start to evaporate then all governments come up with fancy ideas to slow the markets like circuit breakers, brokers throwing in cash to “make” the market. We want the profit but not the pain. Look for a China bounce today. The exit door is getting narrower.

$1,000 goldThursday, January 7, 2016 at 7:25 pm

china is just having their 2009 moment like we had.

Ted FThursday, January 7, 2016 at 6:05 pm

China is one of largest customers for heavy equipment. The Chinese can’t build a decent diesel-electric locomotive, they get them from General Electric and Electro-Motive Diesel (Formerly GM now Caterpillar) Want to move earth or take a multi ton shovel full? The largest earth mover come from here, no other country can do it. Their home grown auto industry is on life support, there is months wait for a US car, Jeep usually having the longest. Just think how much of our technology they steal?

Chuck BurtonThursday, January 7, 2016 at 5:18 pm

$700 Million at last report. By Saturday, who knows. It may be the first Billion Dollar jackpot ever! LOL!

Chuck BurtonFriday, January 8, 2016 at 2:38 pm

$800 Billion this morning!

$1,000 goldThursday, January 7, 2016 at 5:18 pm

everyone knows we’re at an inflection point – watching and waiting to see what happens. if the bears are wrong, we’ll enter the last up wave where everyone gets in. unfortunately for them, that usually happens right before a recession.

Chuck BurtonThursday, January 7, 2016 at 5:44 pm

Larry says TWO upwaves, rising, falling, rising and falling again, lasting through most of the year, and leading to a big collapse, before his big takeoff to 31,000 on the Dow. We shall see…

$1,000 goldThursday, January 7, 2016 at 6:15 pm

we’re still in the bear trap. we’ve pulled back to the level of the shoulder of the inverted h&s. this is exactly what can be expected to happen in a correction. the bottom of the bear trap is usually the last good buying opportunity before the bull resumes.

$1,000 goldThursday, January 7, 2016 at 6:17 pm

i’ve loaded up on stocks during this correction. i’m scared to death to buy any more. if i don’t take on risk, there’s no reward.

$1,000 goldThursday, January 7, 2016 at 6:19 pm

i won’t buy gold until i feel the same fear i’m feeling right now buying stocks.

151Thursday, January 7, 2016 at 7:35 pm

Ah come on Gold-man, swallow those fears!!! ….you are the original perma-bull!

GordonThursday, January 7, 2016 at 10:03 pm

Hey $1,000 don’t put all your bulls in one basket. This bull is running out of gas literally. You cannot continue on hot air and fumes. Factories must be built people employed I see none of that only, Macy’s, Caterpillar, Microsoft etc. dumping employees. The rain always precedes the storm.

$1,000 goldThursday, January 7, 2016 at 10:54 pm

i’m in deep. but i’m not underwater yet. i’m feeling the pressure. i’m a big boy. i can handle it.

$1,000 goldThursday, January 7, 2016 at 10:56 pm

i notice even with all the chaos gold can’t even wake up and get out of bed.

JimThursday, January 7, 2016 at 6:22 pm

I don’t know if it’s time to buy, but I certainly know it isn’t time to sell. The Junk Bond Market will tell the tale. The broad market has already suffered a big sell off. Jim

$1,000 goldThursday, January 7, 2016 at 7:58 pm

i’m not a perma-bull, 151. i’ll become a bear when the fed inverts the yield curve, which appears to be a few years down the road. also, i’ve been a staunch gold bear since the bubble popped at the end of 2011. i have swallowed my fears. i’m buying heavily into this correction.

GordonThursday, January 7, 2016 at 10:05 pm

I was around in 1987 and 2008 now that was big. The junk bond market has received no new issues since the middle of December.

frebonThursday, January 7, 2016 at 5:40 pm

2 weeks ago I wrote to sell, sell, sell. I never thought it would come this fast this soon. We have a Fed that waited far too long to normalize rates because if they did the Saudi’s would be forced to let oil prices seek their own level and China would be almost out of reserves so they couldn’t manipulate anymore. However, these things seem to normalize before long and the panic will subside. Look for high quality, high dividend paying stocks that get beaten down and start to test the waters. The money coming out of China has to go somewhere and here is the best place. This is why the T-bonds are holding their own even in the face of the Fed raising rates.

Jethro BodineThursday, January 7, 2016 at 5:40 pm

What happened to Larry Edelson’s “Dow to 31,000” claims?

Gerald L BaileyThursday, January 7, 2016 at 5:54 pm

Jethro: Apparently you did not pay close attention to Larry E. He said there would be a correction and then the DOW would be going up and could go to 31,000. If China lifts the clamp on capital flows out, then some of that capital would come to US market along with other Locals as Europe, Japan etc. That could prop US market up for while.

Chuck BurtonFriday, January 8, 2016 at 2:32 pm

I see that Chinese billionaires have figured a way to move money internationally: they buy an internet domain, which can cost tens of millions, visit another country, sell the domain to someone in that country, open a bank account there and deposit the proceeds. Then the have capital to spend on assets in that country. Veddy clevah, deeze Chinese.

Jethro BodineTuesday, January 19, 2016 at 5:37 pm

But I did pay attention Gerald – in fact I have a print out of Larry’s article that clearly shows the bottom of the correction being on (or about) October 24. Whoops – wasn’t October of 2015 the best month of the year for the market?

GordonThursday, January 7, 2016 at 10:07 pm

I think he got the 3 and the 1 reversed. If we reach 31,000 it will be time to take another look at the book of Revelations in the bible.

Chuck BurtonThursday, January 7, 2016 at 5:50 pm

Larry could be correct about a sizeable jump in stocks beginning in the next week or so, fueled by that money escaping the market collapse in China. It should be largely confined to Blue Chips, and Tech., if so.

Chuck BurtonThursday, January 7, 2016 at 5:54 pm

That jump shouldn’t last very long, though, since there will only be so much fuel.

Jeremy TaylorThursday, January 7, 2016 at 5:51 pm

Thanks for your daily summary of what goes on in the swamp we call Wall Street and “the markets.” Fun to read, hard to believe. Too bad more folks didn’t read and heed the prophecy of Neil Howe and William Strass in their 1996 book, “The Fourth Turning.” Their case for history in 80-year cycles based on “generational dynamics” provided the path and destination our country has followed to a “T.” Unfortunately, we remain on track for the catastrophic adjustments worldwide they called in 1996. History is the teacher. Woe be unto those who skip class. It is 1936 all over again. Guess what’s coming…? Woe be unto us. ( The 80-year cycle? 1700, 1780, 1860, 1940, 2020…. )

davidThursday, January 7, 2016 at 6:04 pm

Got FCX at 5,50. Plan on sleeping like a baby When the blood runs in the street the rewards are sweet. Hope I was not alone at this basement bargain sale!!! It wont be this cheap again!!!!

Chuck BurtonThursday, January 7, 2016 at 6:20 pm

Larry hasn’t said much about commodities, but he has indicated they will go very big at some future time. You could have a very good buy, david.

JimThursday, January 7, 2016 at 6:24 pm

Bought two thousand myself. Jim

etolearyThursday, January 7, 2016 at 6:14 pm

Mike,
Plenty of reason to think it’s a major leg down: commodity prices in recent month; concern over world wide economic activity; reaction to the folly of the Fed with its way-too-long QE activities, etc. If the success of Bernie Sanders, Donald Trump and Ben Carson represents a pent up frustration with our domestic situation in the US, then why couldn’t current market gyrations be a reflection of cumulative concerns as a contributing if not causal factor internationally? I was a bank CEO for 10 years before my retirement and used to watch the bond market carefully as half of our earning assets were there. We’d get into long periods of a particular sort of rate performance and I’d wonder what can come along to cause the markets to change course. We always figured it out after the fact and I suspect that this is another of those times. We’ll figure it out but meanwhile, there’s a purpose to all of this and we have to be alert to the possibility that we won’t like it. Time to be vigilant and very cautious. Ed O’Leary

Bill MaynardThursday, January 7, 2016 at 6:19 pm

Hi Mike!
If you study the spiritual/metaphysical science of numbers, you’ll learn that 9 is the number of ENDINGS. Since 2-0-1-6 equals and “vibrates” to the number 9, you can expect many types of endings of a 9-year cycle (2016) to occur globally. Moreover, a market analyst on Monday claimed that the first trading day of the year was the worst performance in 84 years! If true, then planetary influences/astrology can readily explain this because the Dow now is beginning its 7-year Uranus Return, and this planet represents surprise changes and revolution. Hence, the next 7 years should be a time of tumultuous stock market activity!

HowardFriday, January 8, 2016 at 7:23 am

Bill

Interesting you mention the Dow and Uranus in the same sentence. Do you make any serious money out of this stuff???

Chuck BurtonThursday, January 7, 2016 at 6:28 pm

‘Don’t know about Numerology, Bill, and whether it will last 7 years, I have no idea, but I think you are correct about surprise changes. I hope the revolution is confined to finances. We seem to be in a time when trading will be the thing. Long term investing could be a losers game for awhile.

JimThursday, January 7, 2016 at 6:32 pm

If you had $10 million to throw around would you give it to Jeb Bush? Jim

JimThursday, January 7, 2016 at 6:56 pm

I know Trump is abrasive and even occasionally obnoxious, but is there anyone out there who understands the effects of taxes and regulation on business activity any better? He knows what small business is up against. He has told the politically correct establishment to take a hike. Most of all. HE CANT BE BOUGHT! I have been called stupid for taking him seriously. Color me stupid. Jim

$1,000 goldThursday, January 7, 2016 at 7:20 pm

color me stupid too. i don’t really care for trump. so, it makes no sense for me to vote for someone i don’t really like, plus i’m not a republican. everyone else out there is so bad i gotta go with trump. the worst part is i’m going to have to look at that ridiculous hairdo for the next four to eight years.

JimThursday, January 7, 2016 at 7:43 pm

I’m a Dem as well, you state my feelings exactly. Maybe if he wins he gets a new hairdresser. Jim

GordonThursday, January 7, 2016 at 10:15 pm

AIG got the big bailout now its payback time. Birds of a feather flock together. It will more than likely be tax deductible for good old Hank. If long shot Bush should win all his “big” money contributors will be in the “cock birds seat”

HowardFriday, January 8, 2016 at 7:27 am

The Donald could not be any worse than any other serving Politian and he may actually help clean the place up.

RoncorThursday, January 7, 2016 at 6:55 pm

“… there has never, EVER been a trading session that lasted only 29 minutes. ”

I guess you never traded commodities.

Donald LinkThursday, January 7, 2016 at 7:30 pm

Remember the fear of Japan Inc. twenty-five years ago? And the world did not end, even for Japan.

Pat AgoniaThursday, January 7, 2016 at 7:30 pm

Suddenly,it seems to me,(as amateur investor, but so what), the focus is no more,at all, on little Ms,pinkblob @ the Fed, but on much wider,bigger, factors and influences;
the Fed is pretty helpless now; if they go on raising rates, they will speed defaults all over; if they halt raises it will make no difference; if they drop them again people will realise the U.S. game is up; if they then do QE 4, 5,etc. they will speed the end of strong us$.and on into the unknown..
My guess is markets continue on a cataract of falls, with steps up, until most of the overhanging excessive debts ,are removed can take a while. A depression for sure , but then rebuild. Keep enough cash out. Hold onto (my) losing goldstocks.
How to time it?….!

151Thursday, January 7, 2016 at 7:43 pm

Good points, Pat. Once this thing really gets going over the next few years (yes, this is not a blip)….the Fed will be nothing but a bad word. The Fed did not exactly cause this but they have made it MUCH worse by stretching the economic rubber band MUCH further than it would have without their interference. And when you stretch it much further….the break is much more violent.

Craig BradleyThursday, January 7, 2016 at 7:57 pm

Apple Still a Winner

The market has its own ideas about stocks and sometimes the crowd behaves badly. Everyone has biases and growth stocks were in, well until this New Year. Facebook has what… $1.00/share in earnings with a P/E of 105, but heck, it is perceived to provide “essential” (online) services and offer coveted growth ( a rarity in today’s economy).

Meanwhile, stalwart Apple and Tim Cook are viewed by the market as has-beens basking in the glory days of the late CEO Steve Jobs and too reliant primarily on I-Phones for most of their global revenue. True, to a certain extent but Apple has $9.50/share in earnings and a P/E of 11 with little debt. So, clearly, Apple is a sturdy stock that pays a dividend that is growing every year.

Personally, I think Apple is in a lull, and had to postpone its “Holy Grail”, a new product/service know as “Apple T.V.” ( Subscription and streaming of movies straight from the studios in competition with Netflix). The back office deals with the studios fell-through for now and the idea is on indefinite hold. Too bad, because this market demands something new from Apple and Steve Jobs has nothing in the wings, as yet. Until he generates enthusiasm with a new product and the hope of growth, the stock is dead money, in my opinion.

You can still make money with Apple with less risk than Facebook by waiting for the market to take it down to extremes. If Apple goes down to say $55.00/share, then you can buy some shares ( a couple hundred shares), collect the dividend while you wait, and with patience, realize some very good gains in the next five years ( Not five months). Traders can make money in the Argentina Marvel Stock Market; up one day, down the next. Be a little creative and stop following the herd ( crowd).

JimThursday, January 7, 2016 at 8:19 pm

Are you better off with a share of Apple or 99 Powerball tickets ? Jim

hawk5000Friday, January 8, 2016 at 5:45 pm

if they are all winners absolutely yes but…. apple and I do own it….. has been putting lip stick on a old pig and and trying to sell it as spring lamb for years one day the customers will realize they just bought back their old pig at 3 times the price

JohnFriday, January 8, 2016 at 7:15 pm

It’s just profit taking at the highs, that’s what you are supposed to do, remember, buy low sell high, it’s not the end of the world!

James CFriday, January 8, 2016 at 7:51 pm

700 million of Euros, Yen, or Dollars is dream money for most. However if i won it Barcelona Football Club i would try and buy. But its a private members club, i can live on in my dreams. I would have a legacy to ast 100years if that was the cade.